As a CFO what would you do and explain to increase the NPV for this problem? Par

Question

As a CFO what would you do and explain to increase the NPV for this problem? Part II - PROBLEMS (40 pts. total 1. Given the following information, calculate the WACC: (12 pts) Common Stock: constant growth dividend of 5% Do is $4.00 Current stock price is $60.00 with 2 million shares Dividend is $7.0 Preferred stock price is $100.00 with 400,000 Preferred Stock shares Tax rate Debt 35% 7 percent coupon bonds with a 6.75% YTM Bond currently sells at 95 with 100,000 bonds a) calculate the WACC: show work

Explanation / Answer

WACC = 10.40%

* $ 4 ( 1.05) / rs - 0.05 = $ 60. rs = 12%

** 6.75 % x ( 1-T) = 6.75% x 65% = 4.3875%

As CFO, I would increase the proportion of debt in the capital structure to bring down overall cost of capital, which would boost the NPV.

Source of capital Market values Market Value Weights Specific costs of capital Weighted costs Common stock $120,000,000 0.7080 0.12* 0.08496 Preferred stock $ 40,000,000 0.2360 0.07 0.01652 Debt $ 9,500,000 0.0560 0.0439** 0.0025 $ 169,500,000 1.0000 0.10398

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.